Equities remain at major inflection point waiting to either make new highs or reverse lower, writes Jeff Greenblatt.
Is that bears hanging on or bulls hanging on? That’s a really good question. It depends on your perspective. What do I mean by this? One distribution day at the right time could sink the 2019 bull phase. The first criteria for a change of direction in any financial market is some calculation or cycle point. It doesn’t necessarily have to validate. Something bigger could be going on.
When we look to the NASDAQ Composite, we have a bottom at 6190 which takes into account the drop from the 2018 top at 1943 points (see chart below). The rise to Monday’s high at 7955 is 1765 points. It is a 90% retracement. By late Wednesday that changed to a 91% retracement. To this point, the retracement squares out with the bottom given the margin of error. Tuesday wasn’t a major bear day but given the choice of going higher or lower, the market chose lower.
On Wednesday there was no follow through. It was a pushback day and since the trend is considered your friend, one has to continue to give the bulls the benefit of the doubt. A similar condition is working in the Nasdaq 100 where a 5895 bottom has been followed up by a move near the top where according to Monday’s prices a 94.5% retracement. On Wednesday it made a new high giving it a move up of 1711 points, which is still just under 95%.
Conditions are still perfectly ripe for a reversal. If it is going to happen, it has to happen almost immediately, say tomorrow. In other words, the tech charts are either one accumulation or distribution day away from determining the fate of this cycle point.
Last week we talked about the bond market. The first leg of whatever is developing ended on Friday. Right now, the bond market is pushing back, a retest of the high. I’ve shown you this is an excellent reading that has great potential, but nothing goes straight up or down. The caveat with the bond market is it likes to waste huge amounts of time going sideways. If there is to be a major drop, it might not develop for days to several weeks. A drop of seven days shouldn’t consolidate for more than a couple of weeks, if that long. The long ball view is a rotation in or out of stocks and bonds, where the higher the stock market goes; the lower bond prices can get. By virtue of the way the bond market works, the lower prices get the higher it sends interest rates. I thought the market could rally into the end of May and there would come a point where interest rates would drop to the point where complacent traders/investors would finally start dumping stocks and that would be the end of the bull market. With the bond market topping around this time, it’s a plausible scenario. The problem is we may need to see the stock market rally survive to keep the rotation intact. Can you see why the tech square out I just mentioned is so important?
Are we really going to see stocks and bonds fall together? For that to happen, there would likely need to be a wild card scenario coming into play. Could stock and bond players rotate to an instrument like gold? If the bond and stock market fell at the same time, something would have to be the beneficiary. Is this even feasible? Gold has been in a trading range since July 2016. It made a marginal higher low in August 2018 where it rallied up through February where it failed to make a new high (see chart below). The higher low on the weekly is good, the lower high is not. Last week’s low in the gold market fell within the 144-week window dating back to the July 2016 high, which hit around the same time as Brexit. If precious metals could lift, now would be an opportune time for it to manifest. With a $1,344 recent high, gold is in a position to react to the 144-week window. Could precious metals go without a rotation out of stocks/bonds? Absolutely it can. This is what makes financial markets so interesting, they are not completely predictable.
Inflection Point
Let’s leave the world of speculation and hypothesis. What we know is the stock market is at a key inflection point. The bond market is bounce mode. Bonds could end up sideways. Stocks are now in the back end of the favorable period of the four-year cycle and it has roughly another seven weeks to run. I remain concerned for the economy and the stock market for the second half of this year.
Jeff Greenblatt discussed Gann Square Outs recently at the TradersEXPO New York
